In this year’s Summer Budget, the Chancellor George Osborne announced a review of pensions and in particular the tax relief thereon.
Currently, individuals get tax relief equivalent to the basic rate of 20% at source, on pension contributions up to £40,000 per annum, assuming they also have income equivalent to this amount. Higher rate and additional rate tax payers can claim further tax relief of 20%/25% via their annual Tax Return. Once an individual starts to draw a pension the income is taxable at the individual’s marginal rate.
Recently there have been a number of articles in the Press speculating the outcome of the pensions review. These include the following possible changes:
- A complete turnaround on how pensions are treated for tax, by removing all tax relief on contributions but also not taxing the pension income once drawn. This would make the pension similar to the current Individual Savings Accounts (ISA) and a new name of Pension Individual Savings Account (PISA) has been mentioned. It is suggested that this change could save the Government a significant amount in tax relief in the short term.
- A further reduction in the annual limit on contributions from the current £40,000.
- A further reduction in the lifetime cap on pension funds from the current £1millon.
- A change in the rate of tax relief allowed on contributions from the current marginal rate applicable to each individual to either basic rate of 20% or possibly a flat rate of 33%, which has been suggested.
No one knows what the outcome of the review will be, but it is possible the results could be revealed as early as this year’s Autumn Statement (scheduled for 25 November 2015). There is little doubt that the current beneficial tax treatment of pension contributions for higher and additional rate tax payers will not be improved and with the Government seeking to raise funds from all sources, there is a distinct possibility that this favorable position could be further eroded in the near future.